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The threat of inflation is real. It is just a different threat than many realize.

Pick any U.S. price gauge, from import to producer prices or the consumer-price index due out Thursday, and it is generally on the rise. It is important to note, though, what is fueling the gains: a jump in prices of commodities such as oil, crops, metals and other raw materials. These have risen due to strong global demand, particularly in emerging markets, and pockets of reduced supply.

.U.S. businesses have found it difficult in many cases to raise prices to cover the increased costs, a reminder of the financial pressure many middle- and lower-income Americans still face. Better economic growth this year should allow companies to pass along some of the higher costs. That is why "core" consumer prices excluding food and energy—the Federal Reserve's preferred inflation gauge—are probably headed higher. This will likely stop the Fed from extending its latest bout of buying government bonds.

As long as it doesn't spark another recession, however, such a tightening of monetary policy isn't likely to crush commodity prices. That underscores the global power shift away from rich but stagnating industrialized nations toward faster-growing, emerging ones.

For the U.S., the danger isn't necessarily an inflationary outbreak—marked by an upward wage-price spiral—so much as a standard-of-living shock. Indeed, household income has barely outpaced inflation since 1975, and gains are largely due to women entering the work force. Median income for men was actually higher, in real terms, in 1973 than in 2009.

The credit boom, along with stock and housing bubbles, helped boost living standards for a time, but wasn't sustainable. A firmer economic footing requires steady job creation and rising wages, which remain elusive. The globalization of the labor force, meanwhile, continues to exert pressure on the U.S. job market even as it pushes up commodity prices by expanding the middle class world-wide.

This vulnerability was highlighted in mid-2008 when oil prices soared and consumer spending promptly tanked. That was before the worst of the recession. Households are hardly better able to handle such a run-up now.

The real risk is that the U.S. faces a poverty cycle rather than an inflationary one.

http://online.wsj.com/article/SB1000142405274870396110457614...
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No. of Recommendations: 3
In a lot of way the standard of living for average and lower income falilies has been declining since the 1950's but it has been masked by the transition from one to two income falamlies being the norm.


Greg
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The weakening of the dollar is an unseen way of lowering our standard of living.
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>> The real risk is that the U.S. faces a poverty cycle rather than an inflationary one. <<

Actually, I think we're facing what some call "biflation" -- the worst of both worlds where discretionary items (and wages) have a very low inflation rate (possibly negative) while the inflation rate of 'essentials' like food, energy, health care and the like remain fairly high.

How many of you are paying the same for your food, health care, electric bill and gasoline as you were a year or two ago? Yet the government's contrived CPI results would lead you to believe there is no inflation. Maybe for someone buying mostly electronic gadgets and cruise vacations, but not someone mostly buying the essentials of modern life.

For ordinary folks, 'biflation' has the same effect as inflation, but without the wage increases to keep up with it.

In reality, the government is best served by a moderately high rate of inflation that can be masked by a low reported inflation rate. They can inflate their debt away without handing out large COLAs. Seems like that's what is happening today.

#29
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